Can the state arbitrage its debt away?

Can the state arbitrage its debt away?

Members of the House Personnel and Pensions Committee have the difficult task of confronting the pensions crisis. But there is a bold proposal coming from the State Universities Annuitants Association (SUAA) to resolve the issue. Their plan is conceptually very simple: the state borrows money at a low interest rate, and reinvests it at a higher rate. By pocketing the difference, the state can fund its pensions with a substantially lower investment than would otherwise be necessary.

Illinois is no stranger to arbitrage schemes. Arbitrage, or buying low and selling high, has already helped the state’s backlog of bills. In October 2017, the state sold $6 billion worth of bonds, and paid off high-interest bills. By turning 12% interest loans into 3% interest loans, the state will save hundreds of millions in interest payments.

The SUAA scheme is similar, but on a much larger scale. Their plan, presented by Dr. Runhuan Feng from the University of Illinois, calls for a bond sale of $107 billion. These bonds would be issued at 5.05%. By reinvesting the cash raised in the pension funds, the state would be able to earn 7.62%. Combined with annual contributions from the state of $8.5 billion, the state would reach its 90% funding goal by 2045. However, it would reach that goal for $103 billion less than the state’s current approach.

Mathematically, the plan is perfect. 7 is larger than 5. Although the scale of the project is daunting, if the underlying assumptions of the plan hold, it will work.

So where’s the catch?

However, representatives listening to the plan in committee were quick to point out potential pitfalls. There was bipartisan skepticism regarding the projected earnings. Both Rep. Jeanne Ives (R-42) and Rep. Scott Drury (D-58) noted that the pension funds routinely fail to perform at the 7.62% rate. If the investments fail to meet these minimum thresholds, the state will not cover the costs of the bond interest. Taxpayers would then be liable for both the pension debt and the bond debt.

But Rep. Drury and others pointed to a more immediate issue. The SUAA plan was not developed by a bond expert. It is unknown if the bond markets will purchase any new bonds from Illinois, much less $107 billion worth. If the market rejects the bond offer, the earning rates are irrelevant. There was consensus that bond experts needed to be consulted immediately, before any more time was given to discussing the specifics of this proposal. Drury said the worst thing that could happen is the House wastes the 2018 session debating a plan that the market would reject.

Given the concerns expressed by the committee, it seems unlikely that this proposal will make much headway. It would be politically very difficult to take on an additional $107 billion in bond debt, especially when the payoffs are not assured as they were for the bill backlog. Still, it is good to see new (and constitutional) proposals being put forward to confront the ever growing pension crisis.

Senior strategist, statehouse reporter and political correspondent for Springfield Daily. Graduate of District 117 and UIS. Thomas covers stories in both Morgan and Sangamon Counties, as well as statewide politics.

Mendoza and Manar introduce “Truth in Hiring Act”

How big is the governor’s staff? That question is more complicated than you might think. Officially, the governor has 44 staffers and a budget of $4.9 million. However, according to Comptroller Susana Mendoza (D), the real number is much higher. A new info graphic put out by her office states the real size of the office is more than twice that size with 102 staffers and a budget of over $10 million.

The discrepancy is due to a practice called “offshoring.” Many people who work for the governor are paid through other offices. Because they are paid by other agencies, the governor’s staff looks smaller than it actually is. Not only does this hide how large the governor’s office is, it also distorts how much money the other agencies actually have. Mendoza made it clear that this is not a new practice. In her press release she said, “It was wrong when Governor Quinn did it. It was wrong when Governor Blagojevich did it. It was wrong when Governor Ryan did it. And it’s still wrong when Governor Rauner does it.”

In response, a bipartisan group of legislators, including Sen. Andy Manar (D-48) have proposed bills in the House and Senate to address this issue. The bills would prohibit paying employees of the Governor’s office out of any funds except those established for that purpose. This does not fire any of the employees who are currently offshored, but it would require paying them through the appropriate office. Often, employees are not even aware they have been offshored.

Gov. Bruce Rauner calls his plan to shift public retiree costs to local schools and colleges good governance, but the majority of state House members say otherwise in their pledge not to support it.

Rauner spoke to a group of business owners about his budget proposal Monday afternoon at Konen Insurance in Aurora. Part of the governor’s plan is to gradually shift the state’s pension costs to local schools and universities. He said it would give schools an incentive to insist on sustainable benefits for employees.

“You want to put responsibility for paying pensions in line with the folks who determine who gets the pension benefits and at what level, so it’s actually good policy to do that,” Rauner said. “Democrats and Republicans have both agreed that it’s the right policy to do.”

The plan did bring both parties together – but not as Rauner had hoped. State Rep. David McSweeney’s resolution opposing Rauner’s plan has 66 cosponsors.

“It would result in a massive property tax increase,” the Barrington Hills Republican said. “The only thing the governor’s doing is shifting the liabilities to local governments and they’ll be forced to raise property taxes.”

State Rep. Stephanie Kifowit, D-Oswego, calls the plan bad policy.

“Shifting billions of dollars of additional costs to our school districts would, in effect, be a property tax increase and an unfunded mandate,” she said.

Rauner said he’s proposing $350 million in additional school funding for fiscal 2019 and that would cover the higher costs. The money he’s referring to is tied to the school funding reform legislation he signed into law last year.

Higher education officials panned the plan last week, saying it would lead to tuition hikes.

House Speaker Michael Madigan proposed a similar plan to shift pension costs to local schools in 2012, leading to one memorable outburst.